If you own a home for any length of time and have kept up your payments, you’ve probably received a few offers in the mail to refinance your mortgage. Those offers probably made you think “Should I refinance? And when?”
The answer isn’t simple. It really depends on a variety of factors, including the interest rate you’re paying now, the new rate you’ll be able to get, your current loan balance, how long you plan to stay in your home, your financial situation, and what you hope to gain out of refinancing. We’ll run through these factors below.
Why People Refinance
There are several reasons why homeowners refinance, but one of the biggest is interest rates. When interest rates fall below your current mortgage rate, refinancing can help you save money over the term of your loan.
Another reason homeowners refinance is to pay off their mortgage faster. Let’s say you have a 30-year mortgage and there are 25 years left. You could refinance your mortgage to a 15-year mortgage and have your home paid off 10 years earlier.
Another reason to refinance is to access funds for a major expense. The longer you have a mortgage, the more you build up equity, which is the difference between your loan balance and the value of your home. By getting something called a cash-out refinance, you can take out some of your home’s equity in cash to pay for home upgrades, your child’s college expenses or to consolidate debt.
When’s the Right Time?
Generally speaking, a good time to refinance may be when mortgage rates fall 0.25-.5 percent below your current rate. It also may be worth considering if you can save at least $100 per month. If you have more than 20 percent of home equity built up and have been paying FHA mortgage insurance premiums, which are not eligible for cancellation like other mortgage insurance, refinancing to a conventional loan may allow you to reduce your payment by that insurance amount and save you a significant amount of money per month.
However, you’ll want to make sure you plan to keep your home long enough to realize the savings from refinancing. Another thing to keep in mind is that refinancing isn’t free. You’ll be getting another mortgage, which means there are lender fees and closing costs involved. On the other hand, most lenders will let you wrap these costs into your new loan, so you don’t have to pay anything out of your pocket.
If you want to refinance your mortgage to a shorter term, you should be aware that your monthly mortgage payment may increase. So, you’ll need to make sure you can afford the larger payments.
If you want to access your home equity through a cash-out refi, you can do this when you have enough equity built up in your home. If you’re going to use the cash to pay off your credit card balances, you could save a lot of money, since the interest rate on credit cards is usually much higher than mortgage rates. However, you’ll be financing all of those expenses over the full term of your mortgage loan. So, you’ll want to make sure that makes sense for your financial situation.
Using a cash-out refi to make home improvements can be a great way to increase the value of your home without having to dig into savings. Remodeling your kitchen, installing hardwood floors or building an addition are all updates that tend to add value to your home, which will pay off when you sell.
If you’re thinking about refinancing, the best course of action is to speak with a mortgage professional first who can analyze your financial situation and your goals and come up with a strategy that makes sense for you. If you’re ready to get started, just give us a call at 1-877-552-2242, or drop us a note to inquiries@rightbyyoumortgage.com. We’ll be happy to answer any questions you have.
